AOTC Taxable Income Selection From 1098T Form

[chrissyluckie]

Hello, 

Most so-called 'experts' say AOTC is zero if Box 1 payments fall below Box 5 total sum for grants or scholarships. One said your max election from Box 5 to pay tax on is limited to any sum in excess of Box 1. But I know better by claiming almost $7,5000 listed in Box 5 last year, per an Intuit Accountant's advice that up to $10,000 is claimable from Box 5. Yet, none of the other self-styled tax experts seem competent enough or feel comfortable with this. So, can someone suggest a way to explain it so they understand this same process, no matter what software is utilized to prepare tax refunds?  I've embedded an image of my exact 2019 Form 1098T that is redacted for privacy and easy reference. Thanks in advance! 

My Exact 2019 Form 1098T Figures (Redacted for Privacy)

[DianeC958]

No, you may not elect to pay taxes on the full amount in Box 5 of your 1098T form.

The IRS receives a copy of your 1098T form.  The information you report in your return needs to match the form you received.

Since your scholarship amount is greater than the amount in box 1 you will not receive the American Opportunity Credit. The American Opportunity Credit is when you paid yourself for school or you paid more than the amount of the scholarship and grants that you received for school.

Link to reporting 1098T information in your tax return.

[chrissyluckie]

Thanks for the reply. Although I reviewed content featured at the link provided in your last message thoroughly, no mention whatsoever is made about electing to pay taxes on grant or scholarship funds. Nonetheless, can you help me understand why IRS Pub. 970 explicitly states that:

"... You may ... increase combined value of an education credit and certain educational assistance of the student includes some or all educational assistance in incomei the year it is received."?

NB: Chs 2-3 also provide examples for Pell Grant as well as private scholarship funds. One section even lists all non-qualified expenses for maximized AOTC eligibility by election as taxable income. (See image below). 

In addition, TurboTax Blog features an excellent piece of advice for reporting FAFSA money on your tax return. An excerpt is copy/pasted verbatim from this post with direct quotes by its author who notes:

"If you get a Pell grant, it won’t be included in your federally taxable income unless used…for unapproved purposes" (emphasis added). IRS Pub 970 clarifies those 'unapproved purposes' much further on pg. 15 where a lengthy section of text with bulleted lists defines various kinds of non-qualified expenses, such as as room, board, transportation, incidentals, clerical services, research assistance or optional equipment purchased for education purposes.

The TurboTax editor goes on to say that:

“…Pell grants retain tax-free status if spent only on [qualified expenses]. However, if funds pay for room, board or school travel, you MUST include this portion of a grant in your taxable income” (emphasis added).

Just hours before this message is written, I completed an interview with the IRS Interactive Tax Assistant regarding my AOTC eligibility. Although this tool allows no textual input by users to calculate specific figures, it did reiterate that one may maximize AOTC if they apply tax free college assistance to their taxable income. Per IRS Pub 970, just two conditions for choosing this option exist:

"[A] scholarship or fellowship grant isn't treated as tax free to the extent the student includes it in gross income and either of the following is true. 

• The scholarship or fellowship grant (or any part of it)
must be applied (by its terms) to expenses ... other than qualified education expenses as defined in Qualified education expenses in chapter 1.

• The scholarship or fellowship grant (or any part of it)
may be applied (by its terms) to expenses (such as
room and board) other than qualified education expenses as defined in Qualified education expenses in
chapter 1" (emphasis in original).

In addition to ONE of those 2 scenarios, IRS Pub. 970 Regs mention $4,000 as maximum difference between expenses and grants or scholarships listed on Form 1098T for a student to make its selection as taxable income. 

I could go on and on but will stop before hopefully not too far behind already :). There are so many references by credible sources, including the IRS itself to dismiss easily.  On retrospect, my impression is an erroneous but very widespread presumption exists among tax prep agents that gift funds must always pay all expenses. So, their own impression from just one look at a Form 1098T with more tax-free assistance than expenses is that it's "worthless," as one recently told me. So, they go no further or may not even be aware that taxable income selection is an option  made possible by one little-known but legal loophole. But putting all that aside for a moment, I'm quite curious to know why you and many others in your profession are so adamantly against what seems clear cut and dry? Or am I totally missing something?

Finally, please realize my own adamance on this question reflects no animosity nor is it meant for any offense whatsoever. By contrast, I have good cause to take special interest beside 'free' US Govt $. Last year, a paid tax prep service rep (now IRS agent), did just what you advise against by almost $7,500 in grants elected as taxed income. This let me get max AOTC with an empty Box 1 on Form 1098T .  So, if he misled or lied to me, I'd like to prepare for imminent horrific consequences of his error. 

Thanks again in advance.

[AmyC]

There are way too many people that fail to realize the the box 5 scholarships can be applied to room and board and other expenses of college that are not tuition, books,and required materials. If you choose to include that scholarship in your income, you have the education expenses from box 1 or 2, left to claim the education credits.

Most people are always trying to reduce their income so they subtract box 1 from box 5 and enter the difference. People get a certain mindset, reduce income and making the jump to increase credits is hard for them.

[chrissyluckie]

Thank you very much for such a frank reply. Your response also verified my suspicion that most so-called tax "experts" just can't grasp increased credits versus reduced taxable income as a valid concept that is 100% legal. This also begs me to ask one more question. Why do paid tax prep services I've gone to use software that won't even show Line 27 on Sch 8863,where students can make an election of grants or scholarships as taxable income?